Self-Storage and Other Real Estate Investments Comparison

When it comes to real estate investments, you can be bogged down by a variety of choices. From residential properties to commercial real estate to self-storage options, each option has its own set of benefits and challenges. Among these, self-storage has been gaining popularity for its unique advantages.

‍

But, is it sensible to make an investment in self storage vs other investments in real estate? Let's dive into an overview of self-storage and traditional real estate investments to get an idea.

Self-Storage vs. Traditional Real Estate Investments

Self-storage facilities offer a practical solution for individuals and businesses needing extra space to store their belongings. These facilities offer multiple storage units of various sizes. These can be rented out on a monthly basis. 

Recently, the self-storage sector has been on steady growth thanks to urbanization, the increase in rental housing, and the rise of small businesses needing affordable storage solutions.

Traditional real estate investments include residential properties, commercial buildings, office spaces, and retail stores. These often require significant capital, extensive management, and longer-term commitments. 

While they can offer great returns, these investments come with higher risks and more complexities. This includes market fluctuations, tenant management, and maintenance issues.

Key Factors Influencing Investment Choices

1. Initial Investment and Costs

Investing in self storage vs other investments requires less initial cost. In traditional real estate, purchasing residential or commercial properties take up major costs. The costs of building or buying a self-storage facility are generally lower. Plus, the ongoing maintenance expenses are minimal.

Traditional real estate investments can involve higher purchase prices, mortgage payments, and maintenance costs.

2. Management and Operational Simplicity

Self-storage facilities are easier to manage than traditional real estate properties. They contain fewer tenant and maintenance issues. You can even use automated systems for rentals and payments. 

On the other hand, managing residential or commercial properties involves dealing with tenants' needs, regular maintenance, and more complex operational requirements.

3. Income Stability and Vacancy Rates

Self-storage units have higher occupancy rates and stable income streams. People and businesses always need storage, regardless of economic conditions. 

Traditional real estate investments, however, can change based on market changes. Also, vacancy rates can significantly impact income stability.

4. Market Demand and Growth Potential

The demand for self-storage is on the rise. This growth potential makes self-storage an attractive option for investors.

Traditional real estate markets can be more volatile. Their demand changes based on factors like economic conditions, location, and property type.

5. Flexibility and Exit Strategy

Self-storage investments offer greater flexibility and easier exit strategies. The leases are typically month-to-month. These allow for quicker adjustments to rental rates and occupancy. 

Selling traditional real estate properties may require longer marketing times and more complicated transactions.

Click Here: Basics of Self-Storage Investment

Now we will look at various factors in detail and understand how self storage vs other investments in real estate function with these factors.

Operational Expense Ratios

Operational expense ratios indicate how much money you spend to keep the property running compared to the income it generates. These ratios are generally lower in self storage vs other investments. Why? Because self-storage facilities often need less management and maintenance.

For example, operational expenses in self-storage investments typically range from 25% to 40% of the gross income. This means a bigger chunk of your income ends up in your pocket. Let’s say if a facility generates $100,000 in revenue, around $30,000 to $40,000 would go towards expenses. 

On the other hand, in residential and commercial properties operational expenses can eat up 50% or more of their income. This is because of higher maintenance costs, property management fees, and other associated expenses.

Let’s understand it a bit better with some points:

• Minimal Maintenance: Self-storage units don't have tenants living in them which reduces the wear and tear. The maintenance mainly involves security, cleanliness, and sometimes repairs. 
• Streamlined Management: Many facilities use automated systems for rentals, payments, and access. This means there is no need for onsite staff. This not only reduces labor costs but also simplifies the overall management process.
• Higher Maintenance Costs: There are a few maintenance issues that affect traditional real estate investments. These can be leaky faucets, broken appliances, and worn-out carpets. 
• Onsite Management: Apartment buildings and office spaces often require on-site property managers. They can handle tenant issues and look after maintenance. This is another cost added to your operation.

Now, how does self storage vs other investments compare in terms of lease flexibility and market adaptability?

Lease Flexibility and Market Adaptability

One of the standout features of self-storage investments is month-to-month leases. 

1. Rental Rate Adjustments: With month-to-month leases, you can adjust rental rates more flexibly. You can also quickly respond to market demand, increase rates during high-demand periods, or offer discounts for new customers. 
2. Client Retention: Despite the short lease terms, self-storage facilities experience high retention rates. This means customers stay longer than they planned if they get good service and security for their items. 

In contrast, traditional real estate investments, typically involve longer-term leases. 

1. Stability: Longer-term leases provide stable income as tenants rent for a specified period. This stability can be great when the market is volatile as it offers steady cash flow. 
2. Lack of Flexibility: Longer-term leases also mean you can’t adjust rental rates in response to market changes. If the market rent increases, you may be locked into lower rates until the lease expires. 

Before you start investing, it’s important to understand the ownership landscape and market entry opportunities in self storage vs other investments. 

Ownership Landscape and Market Entry

Self-Storage

The self-storage industry is known for its fragmented ownership. This means many facilities are owned by independent operators, often referred to as "mom-and-pop" businesses.

• Mom-and-Pop Operators: The independent self-storage owners have their own personal touch and knowledge in managing their properties. However, they lack resources and expertise.
• REITs: Real Estate Investment Trusts in the self-storage sector bring professional management, advanced technology, and substantial capital. They can boost efficiency in operations.

So, what opportunities lie for self-storage investors?

1. Acquisition Opportunities: As the number of independently owned self-storage facilities is high, it creates a favorable environment for acquisitions. Investors can buy many smaller facilities, combine them, and benefit from the profits. 
2. Value-Add Potential: Most of the independently owned facilities may not be modified to profit. To increase revenue and property value, investors can improve operations, upgrade facilities, and implement modern management practices.

Traditional Real Estate Investment 

Traditional real estate markets, such as residential and commercial properties, tend to be more consolidated.

• Mom-and-Pop Operators: In residential and small commercial properties, these offer personal services and community engagement. However, they may not be able to scale their operations.
• REITs: REITs dominate the commercial and residential real estate markets. They offer investors access to different portfolios and professional management. They provide liquidity and lower entry barriers through publicly traded shares, so real estate investment is accessible to a wider audience.

So, what does this mean for real-estate investors?

1. Challenges: Entering such markets can be tough for newcomers. High competition from old players and major capital can become barriers.
2. Opportunities: However, there are still opportunities for new investors in niche markets, such as small multi-family properties or specialty commercial spaces. These offer less competition and potentially higher returns.

Income Diversification and Risk Management

Benefits of Self-Storage Investments

Self-storage investments offer a unique advantage with diversified income streams. Self-storage facilities can rent out multiple units to various customers so income comes from various sources. 

1. Reduced Risk: As income is generated from numerous tenants, the risk on any one tenant is minimal. This is better than traditional real estate where the loss of one tenant can greatly affect your income. 
2. Steady Cash Flow: This diverse tenant base offers a stable and steady cash flow. Even during economic downturns, people and businesses still need storage
3. Additional Revenue Streams: Many self-storage facilities offer additional services such as truck rentals, packing supplies, and insurance. These create more revenue streams.

Read More: Why Self-Storage is an Interesting Investment Opportunity

Challenges of Traditional Real Estate Investments

Traditional real estate investments often involve a single asset or a small portfolio. 

1. Income Dependency: Any one vacancy of tenant can lead to a major drop in income. For example, if your commercial building has one major tenant which you lose then that could result in a big financial loss.
2. Market Vulnerability: Single-asset investments are more vulnerable to local market conditions. If the area sees a decline in the economy, your property’s value and rental income also suffer.
3. High Maintenance and Management Costs: Managing and maintaining a single large property can be costly and time-consuming. Issues can arise like tenant disputes, property repairs, and compliance with local regulations.

Economies of Scale Comparison

‍

Comparative Advantages of Self-Storage

Scalability: Thinking about expanding your investment portfolio? Self-storage facilities can often be built in phases. This means you can start with a smaller facility and add on more units as your business grows. In contrast, expanding traditional real estate like apartment buildings usually requires a much larger upfront investment.

Recession Resilience: Facilities tend to be more recession-proof for self storage vs other investments. During economic hardship, people might downsize their homes or businesses, creating a need for extra storage space.

Lower Turnover Costs: High tenant turnover can eat into your profits in traditional real estate. With self-storage, tenants come and go, but the units themselves are standard and require minimal maintenance between renters. In turn, you get lower turnover costs and a more streamlined operation.

Conclusion

So, which is the right investment for you: self storage vs other investments? Here's a quick recap to help you decide:

• Self-Storage: If you prefer lower ongoing costs, the ability to adapt to market changes with ease, and resilience during economic downturns.
• Traditional Real Estate: If you have a larger upfront investment budget and prefer a more hands-on management style with the potential for higher overall returns.

Ultimately, the best choice depends on your individual goals, risk tolerance, and market conditions. Ready to unlock the potential of self-storage investment?

Wigwam Storage Management can be your trusted partner in this journey. We use advanced technology for secure, convenient storage solutions. We also offer remote storage solutions equipped with top-notch security features like Bluetooth-based locks, remote access, and keyless technology.

Let our professional team guide you in creating sustainable income through smart self-storage investments. Visit Wigwam Storage Management now!